Legit power sector losses

There is growing debate around the topic of write-offs in Pakistan’s power sector, particularly regarding claims filed by K-Electric (KE), the private utility serving Karachi. There are more rumours and chit-chat in the conversation, while the clarity is missing.

The margin of error is almost none. Recovery loss is a ground reality and a legitimate cost as it reflects the portion of receivable that a business is unable to recover from customers despite reasonable collection efforts. The uncollected amounts directly impact the company’s cash flow and profitability and are a recognized risk in credit sales in other businesses as well.

It’s a misnomer to think of write-offs and is unique to Pakistan or as a way to bypass accountability. Around the world, utilities are allowed a framework to recover losses either in the form of an allowance or a post facto grant of write-offs at actual to maintain financial accuracy and operational stability. Countries like the UK, Africa, India, etc., have implemented similar mechanisms to support their utility sectors and maintain financial sustainability.

In Pakistan, the need for write-offs arises mainly from three sources: widespread power theft on disconnection, chronic non-payment, and lack of state writ. These are systemic challenges, not symptoms of poor management. NEPRA has the authority to accept, reject, or partially allow such claims, ensuring checks and balances are in place. Utilities must demonstrate strong recovery efforts, a historical trend of defaults, and ensure that such costs do not disproportionately affect consumers.

Karachi presents a unique set of challenges due to its high population density, informal settlements, and complex socio-economic landscape, which presents added challenges in curbing electricity theft. In this context, expecting 100 percent recovery during tariff setting may not reflect operational realities. In contrast, state-run DISCOs are able to pass their unrecovered dues into the circular debt pool, which currently exceeds Rs2.4 trillion.

KE has claimed Rs 76 billion in write-offs, subject to strict scrutiny and audit, which does not contribute to circular debt, whereas public DISCOs contributed Rs 475 billion to the overall circular debt during the same period, largely without similar scrutiny.

It is worth noting that to fund this circular debt accumulated by government-run DISCOs, the PHL surcharge is recovered from consumers across Pakistan, including KE. Given that KE contributes nothing to this pool, the uniform application of such charges raises questions about policy alignment and investor confidence.

For KE, the impact of delayed decisions on write-offs is significant. The uncertainty around the release of these funds constrains its ability to invest in system upgrades, expand infrastructure, or improve service quality for its over 3.8 million customers. Delays in processing legitimate claims can lead to cash flow strain, increased borrowing, and higher financial costs. These, in turn, affect the company’s ability to fulfill its commitments, both operationally and in terms of consumer service.

Ideally, a forward-looking recovery loss allowance should be allowed by the regulator beyond which the utility should be responsible; however, write-offs, when used correctly, are not a loophole or a sign of failure – they are a realistic financial mechanism that helps organizations acknowledge unrecoverable losses and focus on operational efficiency. They must be backed by regulatory oversight, clear criteria, and transparent communication. The perception that write-offs reflect mismanagement only distracts from the more pressing structural challenges the power sector faces—be it theft, infrastructure limitations, or policy inconsistencies.

For the government to create an enabling environment for privatization and reform, a uniform, transparent approach to allow recovery of losses in a predictable manner is essential. Establishing clear policies backed by regulatory oversight can help build investor confidence and set the stage for a more resilient power sector. Expecting private players to thrive under a framework designed for public sector utilities risks hindering progress.